Strategic Global Sourcing Best Practices

By Fred Sollish and John Semanik

The latest best practice guidance on all aspects of global strategic sourcing-including environmental and international issues

Strategic Global Sourcing Best Practices covers the latest trends and leading edge processes in global strategic sourcing, including supply management, t, sustainability, financial decisions, risk management, and international strategies.

• Offers the latest trends and guidance for sourcing and supply managers
• Features coverage of understanding sourcing, procurement and supply management, procurement and best business practices, best practices in sourcing management and global sourcing management, financial strategies for sourcing, responsible procurement,diversity procurement, managing risk, supplier selection, project management for procurement and supply managers, managing supplier relationships, international sourcing, managing supplier relationships supply management operations,
• With the rise of global supply chains, environmental/sustainability concerns, and constantly evolving technology, the time is right for understanding Strategic Global Sourcing Best Practices.

• Language: English
• Publisher: Wiley
• Release date: Jan 6, 2011
• ISBN: 9780470949306

Book preview

Preface

For most of its history, procurement has been focused primarily on transactional processing, with virtually no strategic decision-making responsibilities. The typical purchasing routine has been simple: receive a requisition from the user, place the purchase order with the supplier, expedite when necessary, and resolve invoice discrepancies. In this process, there was very little room for decision making such as supply sourcing and even less for discretion. Furthermore, it has been widely estimated that even as late as the 1990s, less than 60 percent of an organization's spending with suppliers was controlled by any part of the procurement organization.

Today, this is certainly no longer the case; procurement has evolved into a strategic element in the competitive arsenal of most organizations. There is now a justifiable movement toward centralized control of corporate spending for cost reduction, compliance, and risk management. In fact, many U.S. organizations now mandate that all external spending come under the auspices and control of the procurement or supply management group.

What created this change? We can only surmise. Competitive pressure to reduce costs most likely has a large role; Sarbanes-Oxley legislation requiring the disclosure of risks to shareholders may also contribute. And as executive management's awareness of procurement's potential to positively impact the profitability of the organization evolved, the level of professionalism within the procurement group has improved as well. Twenty years ago, no more than five universities offered graduate degrees in procurement, contract management, or supply management; now there are dozens in the United States alone. The trend points to a sustained increase in demand for educational opportunities in this field.

Recently, an even newer trend has emerged: the division and migration of the procurement/supply management group into strategic and tactical elements. Procurement has developed as a valuable tactical element, overseeing the day-to-day logistics operations with the supply base, while a new element in the procurement process, sourcing, has taken the longer-range, strategic role: finding, qualifying, developing, and contracting with domestic and global supply organizations. Keep in mind that sourcing is still in its relative infancy (although we hear so much about it). Because the process will likely continue to evolve substantially in the coming decade, it becomes difficult to forecast its ultimate evolution.

We will leave the future to visionaries. We chose to address in our review what we believe is the strategic sourcing state of the art at this time. Our task is one of surveying current practices in an attempt to uncover and document what we believe to be the best practices in sourcing operations. And since we are now facing an increasingly integrated world economy, we've tried to sift out those practices that apply globally as well.

We recognize that defining best practices is going to be somewhat subjective, based on the information we can gather and the opinions of others as well as our own. We say this with no attempt to excuse ourselves should we fail to pinpoint each and every one of the areas that come into the picture. Our task, we believe, is to provide the global supply professional with a basis for understanding sourcing practices as they exist today and to be informed enough to understand their evolution in the future.

In the sincere belief that we have accomplished this task, we invite you to join us in the strategic sourcing evolution.

Fred Sollish

San Francisco, California

John Semanik

San Jose, California

Chapter 1

An Overview of Global Strategic Sourcing

Although it has a grandiose-sounding title, strategic sourcing has its roots in very humble beginnings. Sourcing has always been a purchasing and supply management function. In its traditional form, it is the process of locating and employing suppliers. However, various organizations and academics often define this process in different ways when managing their supply chains. As supply chains extend into global markets today, we find under the heading of strategic sourcing a number of often confusing and disparate methods. We expect, in the pages that follow, to bring some measure of clarity to the subject. This chapter provides an overview of the topics we intend to cover in more detail in chapters that follow.

So let's begin our exploration with a basic definition, as we see it, to help keep us in alignment as we go through the more detailed processes in this book. Here is our definition:

Strategic sourcing is an organizational procurement and supply management process used to locate, develop, qualify, and employ suppliers that add maximum value to the buyer's products or services.

The major objective of strategic sourcing is to engage suppliers that align with the strategic business and operational goals of the organization. We apply the term strategic to recognize that many sourcing projects require a long-term plan of supply chain action. It's meeting the needs of this relatively long time horizon that makes sourcing strategic.

When the word global is added to the title, it means that suppliers may be selected beyond the organization's national borders.

Using a thorough, comprehensive process to select suppliers is a path to organizational supply chain management excellence. But this is not an easy task at all. The suppliers we select must be able to lower overall cost, expedite time to market, reduce business risk, improve product or service quality, and support us through flexible scheduling and, possibly, production and engineering support.

Strategic sourcing does not include the day-to-day activities of the acquisition process. It does not include supplier's individual quotations, routine buying activities, logistics, quality assessment, performance analysis, and payment. Essentially, strategic sourcing and procurement part ways following the formation of a contract or the formal qualification of a selected supplier.

Figure 1.1 shows the typical supply management process starting with receipt of a request (requirements) through managing the supplier or contract.

Figure 1.1 The Sourcing and Procurement Process

The Strategic Sourcing Plan

When in place and understood by all stakeholders, a strategic sourcing plan provides guidance to those responsible for implementing acquisition policy. As with any plan, it should be well documented and systematically refer to the organizational mission and vision statements. The plan must also clearly take into account customer requirements that are identified in the organization's broader strategic business plan.

Plan Elements

Many organizations use a standard format in which to create departmental strategic plans. This uniformity helps when various plans are consolidated, since each of the plan elements are treated in a similar order. It also helps to ensure that critical path segments are not overlooked.

The common elements of a strategic plan can be outlined as described in the next subsections.

Mission and Vision

Traditionally, any strategic plan begins with a statement of mission and vision. The mission statement must set the tone for the objectives within the plan. The strategic sourcing plan should also contain a mission statement, and it should clearly align with the organization's business mission statement. It also needs to identify what value will be added by the sourcing group.

It is equally important to communicate the statement to all cross-functional departmental personnel. Most internal organizations work dutifully to create the plan and then place the document on a shelf. Very few cross-functional personnel outside of those who have contributed to the plan even know it exists. On one recent occasion, one of our authors recalls asking the chief executive officer (CEO) of a company he worked for to describe the organization's objectives. Sorry, the CEO said. That information is confidential.

Do you know your organization's mission statement? It's not surprising to find that very few employees know, much less understand, the mission of their organization. In class after class, the authors asked how many attending knew their organization's mission statement well enough to recite it. We considered it fortunate to find more than two in any class of thirty-plus.

Environmental Analysis

An environmental analysis is another traditional element of the strategic sourcing plan. The environmental analysis describes current conditions within the organization as well as with its primary customers, its supply chain, and the overall market or industry. This analysis provides the background against which the plan is developed. Its importance lies in tying objectives to current business conditions; if conditions change significantly, the plan may require revision.

In our analysis, we must also take into account conditions across the entire supply chain that can impact our supply strategy. If we are a semiconductor manufacturer, we must consider our customers’ demand for advanced technology and time our development process to coincide with their plans and technology roadmaps.

SWOT Analysis

The plan should include a comprehensive SWOT (strengths, weaknesses, opportunities, and threats) analysis, traditionally used to guide plan implementers toward defining objectives. A SWOT analysis helps identify potential roadblocks (weaknesses and threats) and prepares the way for dealing with them through organizational strengths. It can also identify potential opportunities that help to implement the plan strategy. In the strategic sourcing plan, it is important to identify roadblock conditions since they invariably affect meeting key objectives. In fact, it is probably a good idea to describe all objectives as they relate to the SWOT analysis.

Assumptions

Although it is ideal to have all of the detail needed to formulate the plan, this is rarely the case. Market dynamics will continue to change throughout the plan's period, and new conditions will arise that are unlikely to be foreseen. So what isn't clearly known or capable of forecast needs to be assumed so that the plan can go forward. These assumptions must be documented since, just as with environmental conditions, they are used as just-in-case placeholders. When we can replace assumptions with known facts, we can then make whatever adjustments to the plan that are required.

Objectives

Within the strategic sourcing plan, we can outline specific business objectives that we expect to achieve. Objectives, as we use the term here, are the expression of specific targets that will advance our mission by adding value to the organization. They are tied to the overall mission statement and take into account environmental conditions, our SWOT analysis, and any assumptions we make.

The plan describes objectives in clear and directive language. For example, our customers may be demanding environmentally friendly products. Do we need to move more aggressively into a green sourcing program?

When developing objectives, it's important to include measurements that go along with them. If you can't measure it, how will you know when you have achieved it?

Obviously, not all goals are of equal importance, and we know that in many cases, our resources will be limited, so it's important to prioritize all goals. Those that are most important are given the highest priority for achievement. We can also consider any objectives that can be achieved without using significant resources, perhaps in the course of fulfilling our general responsibilities.

Objectives for a strategic sourcing plan might include (as examples):

A specific amount of cost saving

An improvement in customer support through reduced lead times from suppliers and better on-time delivery performance

Development of new supplier alliances and partnerships

Reduction of inventory levels through, for example, consignment

Development of new demand management planning tools and models

Strategy

Sourcing strategy must be developed within the scope of the overall mission statement and ensure, to the extent possible, achieving our objectives. For example: We will actively support the organization's ‘first to market’ objectives. This simple statement can then be used to create a strategy. First to market may require Early Supplier Involvement (ESI). This in turn may generate the need for close alliances with key suppliers so that we can develop early involvement. (Early involvement is rather difficult if we are competing all of our purchases and can make an award only once the bids are analyzed.) For the sourcing team, strong business alliances as opposed to full bidding competition on all purchases, for example, represent a distinct strategy.

We must also ensure that our strategy addresses developments throughout the supply chain; it may be economic conditions, or it may be category or commodity shortages that escalate market pricing. We may have solid data, or we may need to make some critical assumptions. If we forecast an economic downturn, for example, we will likely want to reduce inventory in our suppliers’ inventory pipelines.

Within the plan, we must initially identify cross-functional team members and describe their key roles and responsibilities. Particularly important are responsibilities for supplier negotiations and analysis for implementation; that is, developing and interpreting relevant data, and implementing actions such analysis generates. These efforts will likely be parsed out to existing commodity teams, so we will want to determine if we have the right people in the right places at the right time.

Implementation

Keep in mind that the strategic sourcing plan establishes a high-level approach that does not delve into the details of tactical methods. So to implement our strategy, we require an operational strategy and a tactical approach to achieving our goals. This begins with an operational analysis that serves to bridge the strategic plan and the operational tactical plan.

Opportunity Analysis

The strategic sourcing plan needs to address procurement commodities or categories where potential opportunities for improvement have been identified. Improvements can take the form of lower prices, better quality, reduced inventory, and so on. We develop these through an opportunity analysis, typically an extension of the overall sourcing plan into areas managed by commodity or category groups. This analysis should be conducted by a cross-functional strategic sourcing team, preferably before finalizing the plan.

The opportunity analysis often uses industry benchmarks to determine where gaps exist between best practices and current practices in our organization. (We outline the gap analysis methodology in the next section.) These benchmarks, developed by spend commodity, category, or industry, take into account our total annual volume (past and projected) so that we can be sure they are relevant in scope. We also need to know our historical experience with price increases within the commodity or with a specific supplier and what earlier cost and price improvements have been made.

The opportunity analysis and the benchmarking process are often by-products of the market analysis (which we address in Chapter 5) that takes place prior to the development of the strategic plan. Keep in mind that a significant number of opportunities may have been identified subsequent to the previous strategic sourcing plan, but we are, for now, interested only in those opportunities that align with the organization's objectives. Based on the data gathered through our opportunity analysis, we should be able to project the degree to which our plan will support the overall organizational plan.

Typically, the opportunity analysis will cover several elements:

Determine how and with whom we are spending our funds. Known as spend analysis, this process reviews the organization's detailed spending history as a means to finding common items that can be consolidated by using fewer suppliers. The added volume for the suppliers we do use should provide additional price reduction negotiation opportunities.

Review spending history to find multiple items that are very similar and can be respecified to a single item. We refer to this as part standardization or value engineering, and, as with spending analysis, we can leverage the larger consolidated spend as a way to generate price reductions. This is an especially productive area when the organization operates from multiple locations or when a merger or acquisition occurs.

Identify poor supplier performance. Especially in areas that directly support the organization's mission, we should review suppliers’ history to pinpoint those that are well below our expectations. Later we can determine if improvement is possible or if any supplier(s) need to be replaced.

In relation to performance, we want to review (and perhaps benchmark) the measurements we use to assess supplier performance via a scorecard. Is the supplier still relevant? Do our supplier metrics provide an accurate picture of how well the supplier is meeting our needs? And, perhaps more important, are we monitoring the supplier for contract compliance and performance to agreed-on service levels?

Improve competition. Do important elements of our procurement strategies lack robust competition? Do suppliers of these items routinely raise prices regardless of market conditions? Do we have suppliers who believe they are sure to continue to receive our business regardless of business conditions? Do we have products or services that have not been supply competed for several years? A yes to any of these questions may mean that we need to reformulate our supply strategy for achieving the best value from these suppliers as a reward for earning our business.

Investigate outsourcing opportunities. Outsourcing, in general, and Business Process Outsourcing (BPO) specifically, is a well-established, significant component of strategic sourcing. As its title implies, the focus of BPO is on services. Some of the more commonly outsourced services include information technology (although often assigned to its own category), accounts payable, customer support, legal services, design and engineering, research and data analysis, logistics, security, facilities management, financial services, and procurement itself. The primary objectives of outsourcing are relatively clear: reduced cost through lower wages for labor, an extension of the organization's capabilities, a more specialized workforce, greater spend visibility, up-to-date technology, temporary personnel (and recruiting) and, importantly, the ability to meet variable demand without having to add employees.

In addition to business processes, organizations are also engaged in outsourcing elements of manufacturing. In fact, electronic manufacturing services under subcontracts are likely the earliest example of outsourcing, tracing their roots to the traditional make-or-buy practice that would determine if a manufactured part or a manufacturing process could be converted to a purchase. Oddly enough, in the early days of assembly line manufacturing, vertical integration—that is, incorporating all elements of the end product's production within the company—was the rule rather than the exception.

The outsourcing opportunity analysis should take into account geographical considerations, including the pros and cons of offshoring (outsourcing to companies based in other countries) or nearshoring (outsourcing to companies within the organization's national borders). Some aspects to consider in globalizing sourcing activities are the complexity and costs of currency exchange rates, taxes, transportation, and logistics (including Customs), overcoming cultural and language differences, and the risk factors inherent in the local economy and geopolitical climate. (Outsourcing is covered in more detail in Chapter 12.)

Capture additional spending. It is not uncommon for organizations to tolerate spending by any number of departments without procurement involvement, sometimes called maverick spending. Capturing this spending by the sourcing and procurement teams can lead to a number of benefits for the organization, such as improved pricing through negotiation, better value through competitive bidding, and tighter control of supplier performance. Capturing this spending also can assist the sourcing and procurement group in achieving strategic supply savings goals.

Improve internal processes. In many cases, opportunity means work. Organizations sometimes find themselves in the peculiar position of having more cost-saving opportunities than there are staff members to implement them. However, if we can find ways to improve our internal procurement process, it's possible that we can free up resources to engage in cost savings or standardization projects. As an example, Figure 1.2 shows that our model allocates 5 percent of its spending (in dollars) to the MRO (Maintenance, Repair, and Operations), or Indirect, category. But in actual procurement volume, this category would likely account for nearly 50 percent of the ordering volume. Do we really want to allocate 50 percent of our staff to 5 percent of the spending?

Figure 1.2 Supply Positioning

During one recent assignment, our consulting team discovered a similar situation to the one outlined earlier. In developing a spending analysis, it was found that the MRO category accounted for about 8 percent of the procurement spend, with just over 45 percent of the transactions. Half the procurement staff (eight buyers) was allocated to this category of spend. Automating this very-low-risk category produced significant savings. The liberated team members went on to assist commodity groups in harvesting the identified savings possibilities.

By now, many organizations recognize the value gained by using purchasing cards. P-cards virtually eliminate the need to generate a purchase order since the card issuer can provide detailed spending reports that can be approved by management. Similarly, most automated purchase requisitioning systems provide the internal user with a catalog of suppliers with items that they may purchase in various spend categories. Their supply request is routed for approval, and once the proper approvals are obtained, it goes directly to the selected catalog supplier. Each supplier has obligatory responsibilities under a Master Supply Agreement or a similar contractual arrangement, which lowers business risk substantially.

Review of current market conditions. For the sourcing team to identify opportunities that exist in the market, outside of the relatively limited picture taken from the organization's experience, a thorough analysis of external market conditions must be taken. This is perhaps the most important step in the planning process since, ideally, it will provide critical benchmarks used to identify areas of supply opportunity when compared with our own organization's overall performance. We can examine many significant fundamentals. Here are some that are perhaps the most common:

Competitive positioning. To what extent does supplier competition exist? Are there many suppliers or very few? Many suppliers would result in robust competition and the opportunity to leverage and improve our overall cost position. Fewer suppliers might lead to a strategy of placing more of our other types of purchases with these suppliers to gain overall financial leverage, depending on the scope of their business. Similarly, we should know who the major buyers are that create market demand and what likely impact they will have on our sourcing strategy.

Cost profiles. We need to understand